Smart Strategies to Boost Your Retirement Savings
by Laura Rowley
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EmailPrint.Posted on Sunday, October 31, 2010, 12:00AM
It's National Save for Retirement Week, seven days devoted to call attention to an issue most Americans are negligent about. In fact, a survey released this week by TIAA-CREF found that 93 percent of Americans realize that saving is essential for financial security. But 82 percent say they don't know what it takes to reach their goal, and about four in 10 aren't saving at all.
"There's a big fear of the unknown," says Joe Wilson, an Atlanta-based wealth management advisor for TIAA-CREF, a financial services firm that serves employees participating in more than 27,000 retirement plans. "People understand the importance of saving, that's clear from survey — it's just about understanding what the next steps are and what options they have."
There's also the small matter of finding the cash to save when incomes for most people are relatively flat and the costs of food, utilities, gas and health care are rising. While the national savings rate jumped to 5.8 percent in September, that's not because poor and middle-class people are stashing cash in bank accounts, economists say.
"The savings rate has always been driven largely by the affluent," says George Loewenstein, behavioral economist at Carnegie Mellon University. "For a while they had cut back on saving because their assets — most recently their houses — had appreciated so much they were saving without saving, and could (cash out their equity) and spend it. But when the housing market crashed, the affluent segment of society realized it had to do the real hard work of saving."
The personal savings rate doesn't include retirement contributions, but a recent study measuring those accounts shows most workers falling short of their goals. Financial Engines studied 2.8 million participants in 272 employer plans and found nearly three in four 401(k) participants will be able to replace only 45 percent of their pre-retirement income — versus a goal of 70 percent. That's based on their current balances, plan contributions and projected Social Security benefits.
We all know the virtues of brown-bag lunches and carpooling to boost savings. So here are a few strategies from behavioral economists that might help feather your retirement nest:
Translate Short-Term Behavior Into Long-Term Results
Saving for retirement is difficult because the pleasure derived from the money is delayed and intangible — and it's hard to imagine how putting away a few bucks now can make a difference later. Loewenstein says the key is to think big picture.
"In so many situations it's not short-term versus long-term — it's the drop-in-the-bucket problem," he says. "If you're trying to save $500,000 for retirement and you're facing the question of whether you should have a $4 latte, you might as well have it, right?" That small indulgence hardly registers an impact.
Solution: Try this calculator, which shows savers how small daily sacrifices can add up to big dollars in retirement.
Understand How You Frame Goals, and Plan Accordingly
Research has found consumers tend to think about goals in two ways: "High-level construal" focuses on the why — i.e., "I want to save for retirement because I want to spend those years relaxing on the beach." By contrast, "low-level construal" focuses on the how — i.e., "I want to save for retirement, so I need to figure out how to invest my 401(k)."
One study found that when asked to put a specific dollar figure on a goal, the big-picture ("how") folks were more successful at saving, because they focused on the target, while low-level ("why") construers easily discouraged low-level ("why") construers.
If you think about objectives in a big-picture way, try a retirement calculator like this one to put a real number on your goal. (Or spend a half hour with this tool created by Boston University economist Laurence Kotlikoff.)
If you're a detail person, keep it simple: Join your firm's 401(k) plan, contribute at least enough to get an employer match, and boost the contribution by 1 percent every time you get a raise. Choose a life-cycle or target-date fund, which offers an investment mix tailored to your age or retirement date, if the plan offers it. Don't focus on reaching a specific number, because it may discourage you from trying to save at all.
Spread Savings Behavior Through Social Networks
Decades of research underscore the power of social contagion. A study in the New England Journal of Medicine, for example, found that if a friend becomes obese, you have a 60 percent higher chance of similar weight gain. On the upside, another study found a decision by one person to join his employer's retirement plan clearly influences co-workers' decisions to do so.
There's no reason you can't find additional savings by applying social contagion to other settings. Dan Ariely, a behavioral economist at Duke, gave an example from his North Carolina neighborhood, where a group of parents were gathered at a birthday party.
"One person said, 'Look, the kids want a birthday as nice as all the other kids — but all they really want is a chance to run around together. If we all just scaled down, they'd be just as happy,'" recalls Ariely. The suggestion worked, and the neighborhood birthday parties are now more low-key and less costly.
Automate, and Get Help
Perhaps the most effective retirement plan is one that flies on autopilot. In 2007, the Department of Labor approved rules allowing employers to automatically enroll new employees in retirement plans (unless they opt out), and to invest the money in a mix of investments geared to their age and projected retirement date. Those plans have been a boon to younger, lower-paid workers.
Financial Engines found that 52 percent of workers under 30 in default plans have the appropriate risk and diversification for their age, compared with just 12 percent of their peers in plans that don't offer that option. For people earning less than $25,000 a year, the figures were 50 percent and 24 percent, respectively.
If your firm doesn't offer a default investment option, get some advice on how to invest. A separate study by Financial Engines found the median return for participants who got professional investment help offered by their employer was almost 2 percent higher than those who did not.
It doesn't sound like much — but it adds up over time. A 45-year-old who gets help will have saved 47 percent more by age 65 than a peer who doesn't, assuming the 2 percent higher median annual return is maintained over the 20-year period. For a 25-year-old, the difference is more than 100 percent. (If your employer doesn't offer advice, find a fee-only financial planner.)
Finally, if your employer doesn't offer a 401(k) plan, check out my blog for a how-to on individual retirement accounts.
Wednesday, December 29, 2010
Economic Growth and Well Being....
What's the Link Between Economic Growth and Well-Being?
by Laura Rowley
Thursday, December 23, 2010
As countries get wealthier over time, do their citizens get happier? In other words, does more money equal more happiness? The answer seems to be a point of contention among academics and also depends on how you define happiness.
First, a new study of 54 lesser-developed and transitional countries finds happiness does not rise in tandem with economic growth. While it's true that rich people tend to be happier than poor people, and people in more affluent nations report higher levels of happiness, when you track the data in one country over a period of time, higher income doesn't bring greater levels of happiness, according to the study published last week in the Proceedings of the National Academy of Sciences.
The research was conducted by University of Southern California economist Richard Easterlin, who first discovered the phenomenon in the 1970s by studying developed nations such as the U.S. and Japan. He found that big jumps in growth were accompanied by only marginal increases, or declines, in reported happiness. This became known as the "Easterlin Paradox."
"If you look across countries and compare happiness and GDP (gross domestic product) per capita, you find that the higher the country's income, the more likely it is to be happier," Easterlin told the Web site LiveScience. "So the expectation based on point-in-time data is if income goes up, then happiness will go up. The paradox is, when you look at change over time, that doesn't happen."
In this update of his previous work, Easterlin and his colleagues examined 10 and 34 years of happiness survey data from 17 Latin American countries, 17 developed countries, 11 Eastern European countries transitioning from socialism to capitalism and nine-less developed countries. None showed a relationship between economic growth and happiness. Even in China, where per capita income has doubled over the last decade, happiness levels haven't moved at all, the researchers report. Similar economic gains in South Korea and Chile show no correlation with reported happiness levels.
With incomes rising so rapidly in these countries, where are the elevated levels in well-being you'd expect to find?
Not so fast, say Justin Wolfers and Betsy Stevenson, economists at the Wharton School of Business at the University of Pennsylvania. In their recent paper with Ph.D. candidate Daniel Sacks, they studied 140 countries and found that "as countries experience economic growth, their citizens' life satisfaction typically grows, and that those countries experiencing more rapid economic growth also tend to experience more rapid growth in life satisfaction."
Why do the two studies come to opposite conclusions? One problem is that surveys define happiness in several ways. One takes into account feelings, or "daily affect," represented by questions such as "how much did you smile yesterday?" Another is an assessment of life satisfaction, which typically asks people to rank where they stand on an imaginary ladder with "best possible life" at the top and "worst possible life" at the bottom. There's also a "purpose in life" test designed to measure an individual's experience of meaning and purpose in their lives.
The "best possible life" assessment correlates most closely with income. For instance, recent research by Princeton psychologist Daniel Kahneman and economist Angus Deaton found that while more money buys happy feelings, the effect plateaus at around $75,000 in income, while life satisfaction continues to rise with income.
Wolfers suggests that the data in Easterlin's analysis are noisy because it incorporates several different happiness questions. By contrast, Wolfers, Stevenson and Sacks focused on life satisfaction, but to do so, dropped from their analysis a number of countries that didn't have survey data centered on that aspect of well-being.
"Wolfers loses a lot of Latin American countries from his sample," says Carol Graham, senior fellow with the Brookings Institution, who also studies well-being. "If you are interested in the relationship between growth and well-being, you could also argue that dropping a huge number of countries that are of the most interest is also questionable. Every single model is based on assumptions intended to deal with limitations in the data, and you can have very different opinions about whether those assumptions are correct." She says the results can also shift depending on the sample of countries and the time period used.
Graham's own work, for example, has found that Afghans score higher than the world average for daily affect and lower than average on the best possible life ladder. "While naturally cheerful and able to make the best of their lot, the Afghans also know that the best possible life is outside Afghanistan," Graham wrote in a recent blog post about the Easterlin-Wolfers dust-up.
In a season given to self-reflection, the studies provide food for thought when pondering the keys to individual happiness. If you find your well-being has grown over time with your income, as Wolfers and company suggest it should, you can boost it even further by giving generously. Recent research of 136 countries found that using financial resources to help others is consistently associated with greater happiness.
Alternatively, if your happiness has waned because of an income decline, don't ruminate on the loss. Negative feelings make it harder to see the big picture, research shows. Consciously shift your attention to activities that are engaging and meaningful.
On the other hand, if your income has improved over the years and you don't experience a leap in well-being, it's likely the "hedonic treadmill" at work. We get excited about a purchase, then adapt to the things we acquire, and seek more. So it's frightfully easy to adjust to jumps in income; instead of enjoying a bigger paycheck, suddenly we need every dime we make.
There are a few ways to get off the hedonic treadmill. First, avoid comparisons. A number of scholars suggest that it's how we measure up to our peers that matters most to happiness (and thanks to sites like Facebook, it's easier than ever to see how others are doing and judge ourselves against people we haven't seen since the eighth grade).
Graham found this in studies of well-being in China: "When you look rural respondents and ask them to assess their financial situation, they will compare themselves to themselves a year ago. When you ask a migrant urban worker, they automatically look at the reference norm for other people in the new city they just moved to. So their income may have quintupled, but they look at how much other people have."
Second, slow down your hedonic adaptation by spending money on experiences rather than things, and spread them out. You'll get more pleasure out of three or four short vacations than two weeks away each year.
Finally, invest time in things that research has found are critical to well-being: family, friends, your health, your spiritual life, work or hobbies you love. Savor that wealth by taking the time to express gratitude.
And have a happy holiday.
by Laura Rowley
Thursday, December 23, 2010
As countries get wealthier over time, do their citizens get happier? In other words, does more money equal more happiness? The answer seems to be a point of contention among academics and also depends on how you define happiness.
First, a new study of 54 lesser-developed and transitional countries finds happiness does not rise in tandem with economic growth. While it's true that rich people tend to be happier than poor people, and people in more affluent nations report higher levels of happiness, when you track the data in one country over a period of time, higher income doesn't bring greater levels of happiness, according to the study published last week in the Proceedings of the National Academy of Sciences.
The research was conducted by University of Southern California economist Richard Easterlin, who first discovered the phenomenon in the 1970s by studying developed nations such as the U.S. and Japan. He found that big jumps in growth were accompanied by only marginal increases, or declines, in reported happiness. This became known as the "Easterlin Paradox."
"If you look across countries and compare happiness and GDP (gross domestic product) per capita, you find that the higher the country's income, the more likely it is to be happier," Easterlin told the Web site LiveScience. "So the expectation based on point-in-time data is if income goes up, then happiness will go up. The paradox is, when you look at change over time, that doesn't happen."
In this update of his previous work, Easterlin and his colleagues examined 10 and 34 years of happiness survey data from 17 Latin American countries, 17 developed countries, 11 Eastern European countries transitioning from socialism to capitalism and nine-less developed countries. None showed a relationship between economic growth and happiness. Even in China, where per capita income has doubled over the last decade, happiness levels haven't moved at all, the researchers report. Similar economic gains in South Korea and Chile show no correlation with reported happiness levels.
With incomes rising so rapidly in these countries, where are the elevated levels in well-being you'd expect to find?
Not so fast, say Justin Wolfers and Betsy Stevenson, economists at the Wharton School of Business at the University of Pennsylvania. In their recent paper with Ph.D. candidate Daniel Sacks, they studied 140 countries and found that "as countries experience economic growth, their citizens' life satisfaction typically grows, and that those countries experiencing more rapid economic growth also tend to experience more rapid growth in life satisfaction."
Why do the two studies come to opposite conclusions? One problem is that surveys define happiness in several ways. One takes into account feelings, or "daily affect," represented by questions such as "how much did you smile yesterday?" Another is an assessment of life satisfaction, which typically asks people to rank where they stand on an imaginary ladder with "best possible life" at the top and "worst possible life" at the bottom. There's also a "purpose in life" test designed to measure an individual's experience of meaning and purpose in their lives.
The "best possible life" assessment correlates most closely with income. For instance, recent research by Princeton psychologist Daniel Kahneman and economist Angus Deaton found that while more money buys happy feelings, the effect plateaus at around $75,000 in income, while life satisfaction continues to rise with income.
Wolfers suggests that the data in Easterlin's analysis are noisy because it incorporates several different happiness questions. By contrast, Wolfers, Stevenson and Sacks focused on life satisfaction, but to do so, dropped from their analysis a number of countries that didn't have survey data centered on that aspect of well-being.
"Wolfers loses a lot of Latin American countries from his sample," says Carol Graham, senior fellow with the Brookings Institution, who also studies well-being. "If you are interested in the relationship between growth and well-being, you could also argue that dropping a huge number of countries that are of the most interest is also questionable. Every single model is based on assumptions intended to deal with limitations in the data, and you can have very different opinions about whether those assumptions are correct." She says the results can also shift depending on the sample of countries and the time period used.
Graham's own work, for example, has found that Afghans score higher than the world average for daily affect and lower than average on the best possible life ladder. "While naturally cheerful and able to make the best of their lot, the Afghans also know that the best possible life is outside Afghanistan," Graham wrote in a recent blog post about the Easterlin-Wolfers dust-up.
In a season given to self-reflection, the studies provide food for thought when pondering the keys to individual happiness. If you find your well-being has grown over time with your income, as Wolfers and company suggest it should, you can boost it even further by giving generously. Recent research of 136 countries found that using financial resources to help others is consistently associated with greater happiness.
Alternatively, if your happiness has waned because of an income decline, don't ruminate on the loss. Negative feelings make it harder to see the big picture, research shows. Consciously shift your attention to activities that are engaging and meaningful.
On the other hand, if your income has improved over the years and you don't experience a leap in well-being, it's likely the "hedonic treadmill" at work. We get excited about a purchase, then adapt to the things we acquire, and seek more. So it's frightfully easy to adjust to jumps in income; instead of enjoying a bigger paycheck, suddenly we need every dime we make.
There are a few ways to get off the hedonic treadmill. First, avoid comparisons. A number of scholars suggest that it's how we measure up to our peers that matters most to happiness (and thanks to sites like Facebook, it's easier than ever to see how others are doing and judge ourselves against people we haven't seen since the eighth grade).
Graham found this in studies of well-being in China: "When you look rural respondents and ask them to assess their financial situation, they will compare themselves to themselves a year ago. When you ask a migrant urban worker, they automatically look at the reference norm for other people in the new city they just moved to. So their income may have quintupled, but they look at how much other people have."
Second, slow down your hedonic adaptation by spending money on experiences rather than things, and spread them out. You'll get more pleasure out of three or four short vacations than two weeks away each year.
Finally, invest time in things that research has found are critical to well-being: family, friends, your health, your spiritual life, work or hobbies you love. Savor that wealth by taking the time to express gratitude.
And have a happy holiday.
Tuesday, December 28, 2010
Not finance related, but it begins with a bank account ;)
BANK ACCOUNT!!!
A 92-year-old, petite, well-poised and proud man, who is fully dressed each morning by eight o ' clock, with his hair fashionably combed and shaved perfectly, even though he is legally blind, moved to a nursing home today. His wife of 70 years recently passed away, making the move necessary.
After many hours of waiting patiently in the lobby of the nursing home, he smiled sweetly when told his room was ready.
As he maneuvered his walker to the elevator, I provided a visual description of his tiny room, including the eyelet sheets that had been hung on his window. I love it, ' he stated with the enthusiasm of an eight-year-old having just been presented with a new puppy.
Mr. Jones, you haven ' t seen the room; just wait. 'That doesn't have anything to do with it,' he replied. Happiness is something you decide on ahead of time.
Whether I like my room or not doesn ' t depend on how the furniture is arranged ... it ' s how I arrange my mind. I already decided to love it. 'It's a decision I make every morning when I wake up. I have a choice; I can spend the day in bed recounting the difficulty I have with the parts of my body that no longer work, or get out of bed and be thankful for the ones that do. Each day is a gift, and as long as my eyes open, I'll focus on the new day and all the happy memories I've stored away.. Just for this time in my life.
Old age is like a bank account. You withdraw from what you ' ve put in.
So, my advice to you would be to deposit a lot of happiness in the bank account of memories!
Thank you for your part in filling my Memory Bank. I am still depositing.
Remember the five simple rules to be happy:
1. Free your heart from hatred.
2. Free your mind from worries.
3. Live simply.
4. Give more.
5. Expect less.
A 92-year-old, petite, well-poised and proud man, who is fully dressed each morning by eight o ' clock, with his hair fashionably combed and shaved perfectly, even though he is legally blind, moved to a nursing home today. His wife of 70 years recently passed away, making the move necessary.
After many hours of waiting patiently in the lobby of the nursing home, he smiled sweetly when told his room was ready.
As he maneuvered his walker to the elevator, I provided a visual description of his tiny room, including the eyelet sheets that had been hung on his window. I love it, ' he stated with the enthusiasm of an eight-year-old having just been presented with a new puppy.
Mr. Jones, you haven ' t seen the room; just wait. 'That doesn't have anything to do with it,' he replied. Happiness is something you decide on ahead of time.
Whether I like my room or not doesn ' t depend on how the furniture is arranged ... it ' s how I arrange my mind. I already decided to love it. 'It's a decision I make every morning when I wake up. I have a choice; I can spend the day in bed recounting the difficulty I have with the parts of my body that no longer work, or get out of bed and be thankful for the ones that do. Each day is a gift, and as long as my eyes open, I'll focus on the new day and all the happy memories I've stored away.. Just for this time in my life.
Old age is like a bank account. You withdraw from what you ' ve put in.
So, my advice to you would be to deposit a lot of happiness in the bank account of memories!
Thank you for your part in filling my Memory Bank. I am still depositing.
Remember the five simple rules to be happy:
1. Free your heart from hatred.
2. Free your mind from worries.
3. Live simply.
4. Give more.
5. Expect less.
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